An article in Barron’s proposes using modern monetary theory to solve the issue of underfunded state public pensions.
An article by Randall W. Forsyth in Barron’s describes how public sector finances lag, despite recovery in home prices since the recession.
State and local pensions have $8.8 trillion of liabilities, of which only 52% is funded after a decadelong bull market. Falling interest rates have been a major propellant of higher asset prices, but also have lowered pension funds’ income.
The article describes the relatively low rates of return of pension funds, with the median public defined-pension plan’s return at 6.79% as of June 30.
Pensions & Investments reported recently on the number of states who have lowered their assumed rates of return in the past decade. The article quotes a National Association of State Retirement Administrators 2019 report stating,
“The sustained period of low interest rates since 2009 has caused many public pension plans to re-evaluate their long-term expected returns, leading to an unprecedented number of reductions in plan investment return assumptions,” the report said.
For more information, see Public pension funds abandon 8% dreams.
As a way to keep the promises of pensions to retiring baby-boomers, the article in Barron’s proposes a fix: printing money. For more discussion on this approach, see How to Solve the Public Pension Crisis.